While the debate over how countries can reduce carbon emissions continues, political and civic leaders are scrambling to cope with the near certainty of an increasingly carbon-constrained world. In the U.S., President Barack Obama's administration is committed to adopting a new energy policy. Texas Gov. Rick Perry's "economy-friendly" approach for the state has focused on energy efficiency and incentives for clean-energy projects versus emissions penalties on the existing industry. Closer to home, Mayor Annise Parker is positioning Houston as the "alternative energy capital of the world" by promoting zero-emission technologies such as electric vehicles.
Just as climate change discussions are encouraging government leaders at all levels to think creatively about ways to reduce carbon emissions, CEOs should ask themselves how they can use carbon competitiveness to gain an edge over competitors.
Many companies do track their carbon competitiveness, but it is often to ensure regulatory compliance, avoid negative publicity or appeal to eco-conscious customers. It's less typical for companies to try to beat their rivals by identifying the relative strengths and weaknesses of their carbon footprints.
One challenge for most CEOs is that a company's productive assets or product portfolios were developed in less regulated times. Carbon regulation therefore alters the rules of competition. In our experience, within an industry, a company with either "cleaner production assets," or products with lower CO2 emissions, has a chance to dramatically strengthen its position compared to its competitors.
Automobile manufacturers, for example, are vulnerable to indirect emissions from the vehicles they produce. As demand shifts toward more fuel-efficient vehicles, some companies are better off than others, such as Toyota and Honda, because they have a dominant position in low-emission hybrid vehicles—but even they are vulnerable. For example, the city of Houston, in association with Reliant Energy and Nissan North America, is now investing in electric vehicle fleets that demonstrate zero emissions.
On the other hand, utility companies are more at risk because of the carbon emitted directly from generating power. At the industry level, even a modest regulatory requirement for CO2 emissions will result in annual liabilities well in excess of current profits for many companies. But some power companies will be much better positioned than others due to differences in fuel and technology mix. For example, Exelon Corp.'s nuclear power plants will be more competitive to the tune of $1 billion in incremental profits under a $15-a-ton carbon price.
For CEOs who are eager to strengthen their company's future, understanding the new balance of carbon competitiveness within their industry is just the first step. Adjusting to that reality by repositioning a company with less competitive legacy assets and products can take years. Yet evidence of just such shifts is emerging. For example, ExxonMobil, already a low carbon emitter on a per barrel basis, is now ramping up its carbon competitiveness further. It's betting on cleaner burning natural gas and will soon close on its acquisition of XTO and its extensive shale gas resources. ExxonMobil has also committed $600 million in long-term R&D investments in third-generation, algae-based biofuels. Similarly, Shell recently announced a joint venture with Cosan, Brazil's leading sugar-cane biofuel company, to address growing local demand as well as potentially use Brazil as a base to export biofuels globally.
For companies in Texas—and Houston—there are exciting new opportunities for energy leadership. Building carbon competitiveness into their strategy and shrinking their carbon footprint can be a way for these companies to get ahead of domestic competitors as well as beat global competition.
Leis is managing director of Bain & Co.'s Houston office and co-leads the North America oil and gas practice. Steinhubl is a partner in Bain's Houston office and co-leads the North American oil and gas practice.